A Legal Basis for the Firm

Abstract

Fifty years after the publication of Ronald Coase's seminal deliberations on the subject, economists have yet to reach a consensus on the nature of the firm. While many continue to regard the firm as a distinct institution, usually ascribing to it some superior control, information, or adaptive properties, others reject the notion that any unique governance advantages accrue to integration, noting that neither human nature nor technology or information are altered by the purely nominal act of internalization. For the latter, the word firm is merely descriptive, a collective noun denoting a particular cluster of otherwise ordinary contractual relationships. The purpose of this article is not to offer another theory of vertical integration but rather to explore in more depth the logically antecedent question of whether it even makes sense to talk about the firm as a distinct organizational form. Specifically, is there a basis for associating special properties with internal organization, or is the designation firm really just descriptive of a set of commonly observed but otherwise unexceptional contractual relationships? After briefly reviewing key elements of the controversy, I argue that the answer to this question lies in an examination of the broader legal and po-